Question

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $40 per unit. Variable expenses are $20.00 per unit, and fixed expenses total $180,000 per year. Its operating results for last year were as follows:

Sales | $ | 1,080,000 |

Variable expenses | 540,000 | |

Contribution margin | 540,000 | |

Fixed expenses | 180,000 | |

Net operating income | $ | 360,000 |

**Required:**

Answer each question independently based on the original data:

1. What is the product's CM ratio?

2. Use the CM ratio to determine the break-even point in dollar sales.

3. If this year's sales increase by $48,000 and fixed expenses do not change, how much will net operating income increase?

4-a. What is the degree of operating leverage based on last year's sales?

4-b. Assume the president expects this year's sales to increase by 17%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?

5. The sales manager is convinced that a 14% reduction in the selling price, combined with a $77,000 increase in advertising, would increase this year's unit sales by 25%.

a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?

b. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year?

6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.10 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $360,000 net operating income as last year?

Answer #1

**Required 1:**

CM ratio

= Contribution margin / Sales

= 540,000 / 1,080,000

= 50%

**Required 2:**

break-even point in dollar sales

= Fixed expenses / CM ratio

= 180,000 / 50%

= 360,000

**Required 3:**

how much will net operating income increase

= Contribution margin * Contribution margin

= 20 * 48,000

= 960,000

**Required 4-a:**

degree of operating leverage

= Contribution margin / Net operating income

= 540,000 / 360,000

= 1.5

**Required 4-b:**

= degree of operating leverage * sales increase

= 1.5 * 17

= 25.5

**Required 5-a:**

Sales (33,750 * 34.4) | $ | 1,161,000 |

Variable expenses (33,750 * 20) | 675,000 | |

Contribution margin | 486,000 | |

Fixed expenses | 257,000 | |

Net operating income |
$ |
229,000 |

**Required 5-b:** net operating income will
decrease by 131,000

**Required 6:**

Sales (33,750 * 40) | $ | 1,350,000 |

Variable expenses (33,750 * 22.1) | 745,875 | |

Contribution margin | 604,125 | |

Fixed expenses | 244,125 | |

Net operating income |
$ |
360,000 |

Advertising Budget

= New Fixed expenses - Old Fixed expenses

= 244,125 - 180,000

= 64,125

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $40 per unit. Variable expenses are $20.00
per unit, and fixed expenses total $180,000 per year. Its operating
results for last year were as follows: Sales $ 1,080,000 Variable
expenses 540,000 Contribution margin 540,000 Fixed expenses 180,000
Net operating income $ 360,000 The sales manager is convinced that
a 12% reduction in the selling price, combined with a $74,000
increase in advertising, would increase this year's unit sales by...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $40 per unit. Variable expenses are $20.00
per unit, and fixed expenses total $160,000 per year. Its operating
results for last year were as follows:
Sales
$
1,080,000
Variable expenses
540,000
Contribution margin
540,000
Fixed expenses
160,000
Net operating income
$
380,000
Required:
Answer each question independently based on the original
data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $40 per unit. Variable expenses are $20.00
per unit, and fixed expenses total $180,000 per year. Its operating
results for last year were as follows:
Sales
$
1,000,000
Variable expenses
500,000
Contribution margin
500,000
Fixed expenses
180,000
Net operating income
$
320,000
1. What is the product's CM ratio?
CMR= 50%
2. Use the CM ratio to determine the break-even point in
dollar sales.
BE Dollars= 360,000
3. If...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $40 per unit. Variable expenses are $20.00
per unit, and fixed expenses total $180,000 per year. Its operating
results for last year were as follows:
Sales
$
1,000,000
Variable expenses
500,000
Contribution margin
500,000
Fixed expenses
180,000
Net operating income
$
320,000
Required:
Answer each question independently based on the original
data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $80 per unit. Variable expenses are $40.00
per unit, and fixed expenses total $180,000 per year. Its operating
results for last year were as follows:
Sales
$
2,160,000
Variable expenses
1,080,000
Contribution margin
1,080,000
Fixed expenses
180,000
Net operating income
$
900,000
Required:
Answer each question independently based on the original
data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $80 per unit. Variable expenses are $40.00
per unit, and fixed expenses total $180,000 per year. Its operating
results for last year were as follows:
Sales
$
2,160,000
Variable expenses
1,080,000
Contribution margin
1,080,000
Fixed expenses
180,000
Net operating income
$
900,000
Required:
Answer each question independently based on the original
data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $80 per unit. Variable expenses are $40.00
per unit, and fixed expenses total $180,000 per year. Its operating
results for last year were as follows:
Sales
$
2,160,000
Variable expenses
1,080,000
Contribution margin
1,080,000
Fixed expenses
180,000
Net operating income
$
900,000
Required:
Answer each question independently based on the original
data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $40 per unit. Variable expenses are $20.00
per unit, and fixed expenses total $180,000 per year. Its operating
results for last year were as follows:
Sales
$
1,040,000
Variable expenses
520,000
Contribution margin
520,000
Fixed expenses
180,000
Net operating income
$
340,000
5. The sales manager is convinced that a 12% reduction in the
selling price, combined with a $77,000 increase in advertising,
would increase this year's unit sales...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $80 per unit. Variable expenses are $40.00
per unit, and fixed expenses total $160,000 per year. Its operating
results for last year were as follows:
Sales
$
2,240,000
Variable expenses
1,120,000
Contribution margin
1,120,000
Fixed expenses
160,000
Net operating income
$
960,000
Required:
Answer each question independently based on the original
data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point...

Feather Friends, Inc., distributes a high-quality wooden
birdhouse that sells for $120 per unit. Variable expenses are
$60.00 per unit, and fixed expenses total $200,000 per year. Its
operating results for last year were as follows:
Sales
$
3,240,000
Variable
expenses
1,620,000
Contribution
margin
1,620,000
Fixed
expenses
200,000
Net operating
income
$
1,420,000
Required:
Answer each question independently based on the original
data:
1. What is the product's CM ratio?
2. Use the CM ratio to determine the break-even point...

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